Money market mutual funds and ETFs saw strong inflows last year, as investors looked for liquidity that offered modest yields without locking money away.luplupme/iStockPhoto / Getty Images
With concerns about an artificial intelligence (AI) bubble, questions around the U.S. Federal Reserve’s autonomy and rising geopolitical uncertainty, many investors are choosing to take gains and keep more cash on hand.
What’s less clear is where that cash should sit now that the easy answers from the past few years no longer look as attractive.
When inflation surged in 2022 and central banks raced to raise interest rates, guaranteed investment certificates (GICs) and high-interest savings account exchange-traded funds (HISA ETFs) became popular parking spots, offering yields that had been unavailable for more than a decade.
Today, those options look less compelling as rates for GICs have come down sharply alongside interest rates, while rule changes have reduced the appeal of some HISA ETFs. As a result, advisors are seeing more hesitation, more questions and more cash lingering in portfolios.
“We’re seeing people unsure about where to put cash,” says Chris Sievert, a financial advisor and partner at Edward Jones in Kitchener, Ont.
For some, cash is accumulating through dividend and interest payouts, he says, while others are contributing cash to accounts because they’re worried about geopolitical uncertainty. Clients also have money coming out of GICs and bonds that were purchased when rates were higher.
“A few years ago, [they were] getting 4.5, 5, 5.25 per cent on a GIC,” he says. “[The GIC has now] matured; that rate is now 3.5 per cent and it causes them to pause.”
That pause is showing up across the industry. According to data from the Securities and Investment Management Association, money market mutual funds ($7.8-billion) and ETFs ($6.9-billion) saw strong inflows last year, as investors looked for liquidity that offered modest yields without locking money away.
Amy Dietz-Graham, senior wealth advisor and portfolio manager at National Bank Financial Wealth Management in Toronto, says the shift reflects both practical and psychological factors.
“When I meet with a client and they have a lot of cash, my first question is, ‘Why?’” she says. “What is it for? Is it to save for a certain short-term thing, or is this more just their nature to own safety?”
She says the volume of unsettling headlines has made many investors reluctant to commit capital.
“Clients don’t want to believe that the markets are going to go up because there’s so much noise and so much negativity that it feels really, really bad,” she says. “They’ve all set their money aside in these cash piles because they just think that at some point they’ll be right.”
At the same time, she’s starting to see movement.
“I am finding more clients are starting to go into investing because they feel like they missed out last year,” she says. “But there’s that hesitation still because the world feels unsettling.”
Fred Godbolt, financial planner with GC Financial Solutions Group Inc. at Sun Life Financial Investment Services (Canada) Inc. in Exeter, Ont., says the conversation with his clients is less about fleeing to cash and more about how to use it thoughtfully.
“We’re using money market funds over high-interest savings accounts because they’re paying about 0.2 to 0.3 percentage points more,” Mr. Godbolt says, adding that flexibility matters at a time when locking money away feels riskier.
“Why would you lock that money up for terms of time?” he asks, referring to GICs offering less than 3 per cent. With money market funds, “the money’s available and you can redeploy it.”
But he cautions clients about being frozen by indecision and keeping too much cash on hand. “In the longer term, cash is losing ground, so that’s not a long-term play.”
Mr. Sievert of Edward Jones approaches the decision by working backward from a client’s needs, such as if they need money in the next two to three years or if they’re investing for 20 to 40 years.
Shorter time horizons often point toward predictable options such as GICs or other fixed-income investments, even if returns are lower, he says, but it’s important to consider the liquidity of each asset.
“GICs are illiquid for us,” Mr. Sievert says. “That’s where a bond or a fixed-income ETF might make sense.”
All three advisors agreed that cash decisions are emotional. While holding cash can feel safe, it also carries risks that are easy to overlook.
In some cases, doing nothing for a while is the right move, and Mr. Sievert often encourages clients who receive an inheritance or sell a business to slow down.
“What if they waited six months?” he says. “Meanwhile, they got used to this money and evaluated what they needed and [learned about] their relationship with that money before they decided what to do with that cash.”